Introduction

• trustees are under certain duties, failure to carry out a duty leads to breach of trust & is actionable in courts by beneficiaries
• trustees may also have powers or discretions which are an authority to act rather than an obligation

Trustees: fiduciary position

• fiduciary duties are imposed on trustees because they are in position of confidence & office provides scope for abuse
• trustees control trust property for interests of beneficiaries
• equity classifies relationship as fiduciary one: to prevent trustees abusing their office & acting in their own interest above beneficiaries' interests
• trustees subject to negative obligations: must act with loyalty & good faith & not allow personal interest to conflict with duties to trust
• if trustees do place themselves in position of conflict & make unauthorised profit for themselves: must be surrendered to trust
• some uncertainty exists over when fiduciary relationships arise

  LAC Minerals v International Corona Resources (1989) DLR 14

  • there are few concepts more frequently invoked but less conceptually certain than that of the fiduciary relationship

  Bristol & West Building Society v Mothew [1998]

  • a fiduciary: someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence
• some relationships are inherently fiduciary:
  trustee & beneficiary
  personal representative & beneficiaries under will or intestacy
  solicitor & client
  principal & agent (principle may appoint agent to negotiate a contract)
  partners in business (as opposed to limited company)
  director owes fiduciary duties to company
• courts also may extend fiduciary relationship to circumstances where A is relying on B's loyalty & is especially vulnerable to B taking advantage of situation

  Reading v Attorney-General [1949] 2 KB 239

  • army sergeant used his uniform to allow lorries carrying illegal good through checkpoints
  • sergeant owed fiduciary duty to employer & was accountable for bribes he received
• nature of specific fiduciary duties differ depending on particular fiduciary relationship

  Attorney-General v Blake [1998] 1 All ER 833

  • There is more than one category of fiduciary relationship, and the different categories possess different characteristics and attract different kinds of fiduciary obligations
• courts adopt a strict liability approach

  Bristol & West Building society v Mothew [1998] Ch 1

  • The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal
• trustee must surrender any profit made out of conflict of interest situation to trust: regardless of whether trustee who profits was honest, trust could not have made profit itself or trust has not lost anything

  Keech v Sandford (1726) Sel Cas Ch 61

  • strict rule applied in part due to evidential difficulty in showing whether trustee was honest or not
• courts will also not investigate honesty of trustee due to nature of fiduciary duties

  Bray v Ford [1896] AC 44

  • It is an inflexible rule of a Court of Equity that a person in a fiduciary position... is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is a danger, in such circumstances of a person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he is bound to protect. It has, therefore, been deemed expedient to lay down this positive rule. But I am satisfied that it might be departed from in many cases, without any breach of morality, without any wrong being inflicted, and without any consciousness of wrong-doing.
• deterrent or prophylactic approach: preventative measure to deter trustees form making profits form outset & ensure fiduciary duties carried out with undivided loyalty
• personal & proprietary remedies available to beneficiaries if trustees make unauthorised profit
• personal remedy: beneficiary seeks monetary compensation for breach of trust from trustee (often equal to loss to trust fund)
• if breach of fiduciary may not resulted in loss to trust fund but trustee has made unauthorised profit: beneficiaries can require trustee to pay unauthorised profit to trust in 'personal' claim (an action to account)
• proprietary remedy: beneficiaries can claim property representing profit as trust property & if successful trustee holds property on a constructive for beneficiaries
• engaging in competition with trust may mean trustee personal interest conflicts with trust

  Re Thomson [1930] 1 Ch 203

  • injunction preventing trustee setting up as a yacht-broker in same town as yacht-broker's business carried on by the trust

Fiduciary position: purchase of trust property

• clear breach of no conflict rule: if trustees attempts to purchase trust property from themselves & co-trustees
  self dealing rule applies & beneficiaries can apply for transaction to be voided
  if beneficiaries do not do so within reasonable time then sale is valid
• if beneficiaries void sale: can demand trustee returns property to trust (trustee is reimbursed with purchase price)
  if trustee sold to bone fide purchaser, beneficiaries can demand any profit made on sale
• traditionally self-dealing rule applied strictly

  Ex parte Lacey (1802) 6 Ves 625

  • court unwilling to consider whether trustee had gained unfair advantage

• Ex parte James (1803) 8 Ves 337

  • This doctrine as to purchase by trustees... stands more upon general principle than upon the circumstances of any individual case. It rests upon this that 'the purchase is not permitted in any case, however honest the circumstances; the general interests of justice requiring it to be destroyed in every instance.

  Holder v Holder [1968] Ch 353

  Facts:

  • V (a personal representative) purchased equivalent of trust property
  • V had previously purported to renounce office of personal representative but had not done so effectively

  Issue:

  • was purchase voidable?

  Held:

  • Court of Appeal: purchase not void
  • V had not acted as seller & buyer (he played no part in sale or fixing price)
  • V's special knowledge gained was not as personal representative but as long term tenant of property
  • no conflict of interest: V made his intention to bid for property clear so beneficiaries did not expect him to protect their interests
  • price paid was higher than market value, as V was sitting tenant & keen to stay

  Re Thompson's Settlement [1986] Ch 99

  • upheld strict approach in Ex parte Lacey that all purchases of trust property by a trustee are voidable regardless of whether the price is fair and whether the trustee took advantage
• Exceptions where sale not voidable:
  all beneficiaries sui juris & consent to sale with full knowledge of facts
  trust instrument authorises sale to trustee
  trustee obtains court's consent

Fiduciary position: purchase of equitable interest

• trustees may wish to buy beneficiaries equitable interest
• fair-dealing rule: trustees must show that it was fair & no undue influence
• less protection necessary as beneficiaries in control of sale of interest (as opposed to sale of trust property)
• conflicts of interest may arise due to trustee's position of influence
• trustees must ensure:
  disclose material facts to beneficiary
  transaction is fair & honest
  demonstrate no advantage exercised & beneficiary made independent decision (usually sufficient to have taken independent advice)

Fiduciary position: remuneration of trustees

• traditionally trustees were generally only permitted to charge for out of pocket expenses, however due to complexities of trust law many trustees are now professionals wishing to charge for their services
• several exceptions to no-remuneration rule exist today
• charging clause in trust instrument: expressly allow for trustees' fees
• beneficiaries' consent: agreement of sui juris beneficiaries without undue influence (must be all beneficiaries)
• court order: inherent jurisdiction to authorise remuneration

  Re Duke of Norfolk's Settlement Trusts [1981] 3 All ER 220

  • courts balance: need to protect beneficiaries against trustees' claims v. effective trust administration
  • court order remuneration if: in interests of beneficiaries (skill of trustee or professional fees not excessive not excessive)
• statutory provision to charge fees

  Trustee Act 2000

  • s.28: defines trustee acting in professional capacity
    s.28(2): even if could be provided by lay person
    s.28(4): payments are remuneration for services not gift
    s.28(5): professional capacity if acts in course of profession which consists of or includes
    s.28(5)(a): management or administration of trusts
    s.28(5)(b): any a particular aspect of management or administration of trusts
  • s.29: trustees acting in professional capacity power to charge reasonable fees in certain circumstances if no charging clause or trustees agree in writing
    s.29(2): trustee who not trust corporation can only charge fees if all do
    s.29(3): reasonable remuneration: nature of services, type of trsut, attributes of trustee
    s.29(5): not entitled to remuneration if any provision about entitlement has been made in trust instrument

Fiduciary position: incidental profits

• trustees must account for personal profit gained as result of use of trust property, or opportunity/information gained as trustee
• alternatively beneficiaries may make proprietary claim the profit is held on constructive for them
• indirect remuneration from a third party: if trust holds substantial number of shares in company, often trustee becomes director of company to safeguard interest (using voting rights attached to share ownership to become elected director) question arises as to what should happen to director's fees

  Re Macadam [1946] Ch 73

  • the root of the matter really is: did [the trustee] acquire the position in respect of which he drew the remuneration by virtue of his position as trustee?

  Re Gee [1948] Ch 284

  • if trustee becomes a director without trust share voting being decisive: directorship obtained independently & trustee may keep shares
• commission may be offered to trustees, for example for choosing a particular insurance scheme

  Williams v Barton [1927] 2 Ch 9

  • any commission accepted by trustee is a profit made out of his position & must be surrendered to the trust
• general rule: trustees accountable for any profit made from third party as result of trusteeship
• except: if authorised by trust instrument or court order
• trustees may attempt to acquire a new lease or freehold for personal benefit

  Keech v Sandford (1726) 2 Eq Cas Abr 741

  Facts:

  • T held property on trust for B, life reminder for C
  • trust property includes lease of a farm which is about to expire
  • T's request that landlady grants further lease to trust is refused as landlady has argued with B
  • T renews lease for his own personal benefit

  Issue:

  • can B & C claim benefit of lease?

  Held:

  • T must assign benefit of new lease to B & C
  • no profit rule must be applied strictly

  Protheroe v Protheroe [1968] 1 WLR 519

  • Keech v Sandford rule applies to freehold reversion property: freehold held on constructive trust for beneficiaries subject to trust reimbursing trustee for purchase price & expenses
• trustee accountable for profit made from opportunities or information gained as a trustee

  Boardman v Phipps [1967] 2 AC 46

  Facts:

  • testator's will created trust for wife & children (including shares in private company)
  • D's: trust's solicitor (B) & testator's youngest son (D) attended shareholder meetings as proxies of two trustees
  • B & D asked trustees if they objecting to them purchasing more shares in company out of their own funds (trust did not have further funds available to buy more shares)
  • trustees did not object although given insufficient information to have consented
  • B & D bought shares & gained control of company & turned it into profitable enterprise
  • company made substantial profit & distributed funds to shareholders including B, D & trust

  Issue:

  • could trust claim B & D' s profits?

  Held:

  • B & D found to owe beneficiaries fiduciary duties (as purported to act as agents for the trust at company meeting)
  • B & D breached fiduciary duty
  • information & opportunity to buy shares came to B & D by virtue of their fiduciary position
  • B placed himself in position of conflict: if trust had approached him for legal advice whether to apply to court to give trust power to sell shares (unlikely would have occurred irrelevant)
  • minority: went further suggesting information gained in a fiduciary capacity is trust propert
  • B & D had to account to trust for their profits (subject to trsurt reimbursing them for costs) but court awarded generous remuneration under inherent jurisdiction
• under Boardman v Phipps, fiduciaries strictly accountable (despite trust not suffering loss & honesty of defendants)
• fiduciary duties of company directors addressed in statute

  Companies Act 2006

  • s.175: director must avoid situation where he has direct or indirect interest which conflicts or possibly conflicts with interests of company
    no breach of duty if situation cannot reasonably be regarded as likely to give rise to a conflict of interest
    duty applies to exploitation of any property, information or opportunity (immaterial whether company could take advantage of it)
    not apply if conflict arises in relation to transaction with company itself (providing director has declared interest)
  • s.176: directors prevented from accepting third party benefits by reason of directorship, unless acceptance could not reasonably be regarded as likely to give rise to a conflict of interest or it is authorised by shareholders
• private company director can obtain consent of co-directors not involved in conflict & other directors need to gain shareholder consent

Breach of fiduciary duty: remedies

• personal claim: beneficiaries can sue trustee for compensation equal to profit
• proprietary claim: beneficiaries claim actual property is held on constructive trust for them
• proprietary claim more advantageous: if trustee bankrupt or has invested profit & made further gain
• question: whether beneficiaries should always have proprietary claim
• contentious as some argue give beneficiaries unfair advantage over trustee's creditors

  Lister v Stubbs (1890) 45 ChD 1

  Facts:

  • S worked for L as purchaser & placed orders with V
  • V paid S secret commission
  • S purchased land with commission

  Issue:

  • could L bring proprietary claim for land?

  Held:

  • Court of Appeal: personal claim only for amount of commission
  • would produce unfair results if S was bankrupt, as beneficiaries (L) would have priority & L not lost anything merely stripping fiduciary of profit
  • whereas creditors would have made a loss distinguished from cases were trustee has wrongfully taken trust property, invested & made profit: proprietary claim possible

  AG for Hong Kong v Reid [1994] 1 AC 324

  Facts:

  • D (government employee) owed C (Crown) fiduciary duties
  • D accepted bribes & used money to invest in properties

  Issue:

  • could C bring proprietary claim?

  Held:

  • Privy Council: proprietary claim possibleconstructive trust of the properties for C

  Sinclair Investments v Versailles Trade Finance [2011] All ER 321

  • Court of Appeal: approved approach in Lister v Stubbs
  • proprietary claim not universally available to claim unauthorised profit
  • proprietary claim only if made out of use of trust property or an opportunity or right belonging to the trust

  FHR European Ventures LLP v Mankarious [2012] 2 BCLC 39

  • Court of Appeal: law in this area is complex & uncertain as dependant on very fine factual distinctions

  Murad v Al Saraj [2005] EWCA Civ 959

  • It may be that the time has come when the court should revisit the operation of the inflexible rule of equity in harsh circumstances, as where the trustee has acted in perfectgood faith and without deception or concealment, and in the belief that he was acting in the best interest of the beneficiary

Trustees: duties

• office of trustee is onerous

  Eaves v Hickson (1861) 30 Beav. 136

  • trustees had to reimburse trust after being induced by forgery to pay trust funds to persons not entitled

  Ministry of Health v Simpson [1951] AC 251

  • trustees liable for distributing trust fund to charities not realising that the terms of the trust (for charitable or benevolent purposes) were void

  Townley v Sherborn (1633) J Bridg 35

  • trustee liable for money misappropriated by co-trustee because he allowed did not check what co-trustee was doing with money
• beneficiaries can force trustees to carry out their duties & claim compensation if duty is breached resulting in loss to trust
• trustees also owe duty of care (stator & as laid down by case law)

  Speight v Gaunt (1883) 22 ChD 727

  • trustees must act as prudent men of buisness

  Bartlett v Barclays Bank [1980] 1 All ER 139

  • higher standards expected of paid professional trustees

Duties of trustees: investment

• if trustees holding fund on trust for A for life reminder to B
  A entitled to trust income and B to trust capital
  trustees need to ensure trust investments produce capital growth & income
• income has quality of recurrence (interest or dividends)& capital is one off payment
• trustees owe a duty to choose suitable investments (guided by nature of beneficial interests) in terms of type of growth & period of investment
• speculative investments may return high profit but are risky so trustees should not invest too heavily
• larger funds (pension schemes) can afford to be more adventurous as they can diversify, offsetting risk of loss
• trustees have duty to invest trust property, if do not will be liable for loss caused to fund
• no statutory definition of investment

  Cook v Medway Housing Authority [1997] STC 90

  • investment: is something which is expected to produce income or capital growth
• trustees obligations detailed in Trustee Act 2000

  Trustee Act 2000

  • s.1: trustees owe duty care to exercise care & skill as is reasonable in circumstances, with regard to any special knowledge or experience he holds, or if professional that of reasonable professional
  • s.3: trustees can make any investment possible if they had been absolutely entitled to trust fund
  • s.4(1): if exercising any powers of investment trustees must have regard to standard investment criteria
    s.4(2): trustee must from time to time review investments & if should be varied in accordance with standard investment criteria
    s.4(3): suitability of investment (in terms of type & particular case & beneficial interest) & diversification
  • s.5: trustees must obtain & consider proper advice before investing unless reasonable to conclude unnecessary or inappropriate
  • s.6: trust instrument may exclude, restrict or add to provisions of TA 2000
  • s.7: TA 2000 applies to all trusts whether created before or after came into force
• trustees have a duty to act in the best financial interest of the beneficiaries

  Bartlett v Barclays Bank [1980] 1 All ER 139

  • trustees must ensure they have sufficient information about a company's affairs to know when they need to take action to protect the value of trust's shareholding
• duty to act impartially between beneficiaries
• trustees in breach of duty if they do not disregard ethical considerations when investing

  Cowan v Scargill [1985] Ch 270

  • duty to act in best financial interests of beneficiaries meant trustees for coal miners pension fund not justified in avoiding overseas investments & those connected with oil industry (because it competed with coal mining)
• if investment in Y, yielded same return as Z (a company raising ethical, social or moral concerns), trustees can use discretion to invest in Y

  Stephenson v Barclays Bank [1975] 1 WLR 882

  • beneficiaries cannot insist that trustees exercise their discretions in a particular way
• settlor can instruct avoiding certain types of investment in trust instrument & trustees must comply
• different standard when considering charitable trusts

  Harries v Church of England Commissioners [1992] 1 WLR 1241

  • trustees acting properly if refused to invest in companies manufacturing armaments: inappropriate to invest in anything which may alienate supporters
• if trustees breach duty & as result trust fund has diminished: beneficiaries have right of action, question: what if trust fund has remained static or not increased as expected?

  Nestle v National Westminster Bank [1993] 1 WLR 1260

  • failure of trust fund to grow in line with what a prudent trustee would have achieved: evidence trustees breached duty of care
  • the importance of preservation of a trust fund will always outweigh success in its advancement

Duties of trustees: delegation

• traditionally trustees seen as acting personally in equity

  Turner v Corney (1841) 5 Beav 515

  • trustees who take on themselves the management of property for the benefit of others have no right to shift their duty on other persons
• with increased complexities of trusts courts authorise some delegation

  Pilkington v IRC [1964] AC 612

  Facts:

  • the law is not that trustees cannot delegate: it is that trustees cannot delegate unless they have authority to do so
• collective delegation: all trustees agree to delegate some aspect of trust management, power to delegate governed by Trustee Act 2000

  Trustee Act 2000

  • s.11(1): trustees may authorise any person to exercise any or all of their delegable functions as their agent
  • s.11(2): trustees cannot delegate
    (a): dispositive power to distribute trust property to beneficiaries
    (b): powers to decide whether payments should be made from income or capital
    (c): powers to appoint new trustee
  • s12(3): trustees may not delegate to beneficiaries.
  • s.32: if delegation permitted trustees can pay agent reasonable remuneration form trust funds
  • s.15(1): trustees can only authorise agent to carry out asset management functions by written agreement
  • s.15(2): trustees cannot authorise agent to carry out asset management functions unless
    prepared policy statement: guidance how functions should be carried out
    agreement includes term that agent will comply with policy statement or revised policy statement
  • s.15(3):policy statement guidance must be formulated with view to ensure functions exercised in best interests of trust
  • s.15(4):policy statement must be evidenced in writing
  • s.15(5):asset management functions are trustees' functions relating to:
    investment of trust assets
    acquisition of trust property
    managing trust property & disposing or creating interest in trust property
• policy statement should highlight:
  fiduciary duties apply
  nature of beneficial interests: whether priority capital growth or income or balance
  investment provisions of trust instrument
  date trustees need to sell or realise investment
  requirements on agent to report to trustees
  
• question: whether trustees liable for agent's default?

  Trustee Act 2000

  • s.23: trustee not vicariously liable for agent's defaults unless he has not complied with duty of care:
    in entering into arrangements with agent
    or duties under s.22
  • s.22(1): trustee has duty to keep under review arrangement with agent & exercise power of intervention (to direct agent or revoke authorisation) if necessary
  • s.22(2): if agent authorised to exercise asset management functions, trustee has duty to consider revision of policy statement & assess whether policy statement is being complied with
• trustees only liable if they have breached one of their own duties & this has caused or contributed to the loss
• individual delegation: if one trustee cannot act for a period, he can appoint an attorney to carry out his work with other trustees
• all trustees under duty to play an active role in trust affairs & if absent for period may be liable for loss caused by remaining trustees
• individual delegation governed by Trustee Act 1925, Powers of Attorney Act 1971 & Trustee Delegation Act 1999
• appointment of attorney: execution of formal power of attorney document

  Trustee Act 1925

  • s.25(1): trustee may delegate any of powers, discretions or duties (either full office or selected functions)
  • s.25(2): trustee can delegate for 12 month maximum period, if nothing stated period will expire at 12 months
  • s.25(7): trustee liable for attorney's acts or defaults, as if his own

Trustees' powers: income & capital

• trustees have statutory powers to give trust income or capital to beneficiaries before strictly entitled under terms of trust
• trustees must check statutory powers not excluded under trust instrument
• s.31 Trustee Act 1925 deals trust income & s.32 TA 1925 with trustees' ability to distribute capital
• if trustees wish to act outside powers under statue or trust instrument can apply to court

  Trustee Act 1925

  • s.57: court can authorise transactions in the management or administration of any property vested in trustees if expedient & for benefit of trust
• alternatively trustees can seek consent of all beneficiaries (if sui juris, given all relevant information)

Trustees' powers: advancement

• advancement is way trustees may release part of beneficiary's entitlement to trust capital early

  Trustee Act 1925

  • s.32: trustees may pay or apply any trust capital:
    for advancement or benefit
    of beneficiary entitled to or share of the capital of the trust property
    whether beneficiary entitled absolutely or contingently
    amount shall not exceed half of beneficiary's presumptive or vested share
    if beneficiary becomes absolutely & indefeasibly entitled, their share will be reduced by amount of advancement
    only necessary to obtain consents if prior interest
    trustees must check whether trust instrument varies this power
    if beneficiary dies before contingency age, estate does not have to repay any advancements made
• prior interest may exists if:
  A entitled to trust income for life, B in remainder
  advancement for B requires A 's consent (as trust income likely to reduce as result of smaller trust capital)
• payment must be for beneficiary's advancement or benefit

  Pilkington v IRC [1964] AC 612

  • House of Lords: advancement or benefit means: any use of the money which will improve the material situation of the beneficiary
  • tax savings may be a benefit
  • valid advancement may incidentally benefit others too

  Re Halsted [1937] 2 All ER 570

  Facts:

  • beneficiary sought advancement, so he could make provision for his wife & children by settling money on himself for life and family in remainder

  Issue:

  • was advancement valid?

  Held:

  • valid advancement: relief from anxiety about future maintenance of family sufficient benefit under s.32 TA 1925

  Re Clore's Settlement Trusts [1966] 1 WLR 955

  • court allowed advancement to beneficiary who felt morally obliged to donate to charity (benefit as donation not made from his own funds)
• breach of trust: if advancement seeks to improve material situation of someone other than the beneficiary

  Re Pauling's Settlement Trusts [1964] Ch. 303

  Facts:

  • Ts held on trust for wife for life & remainder for children
  • father asked Ts to make advancement to children, purportedly for their benefit
  • reason was to pay for family home & clear wife's overdraft

  Issue:

  • was advancement valid?

  Held:

  • improper exercise of powers of advancement
• advancement at trustees' discretion: most beneficiary can do is demand trustees consider whether to exercise powers of advancement
• if trustees want to make advancement but powers do not apply: could make loan to beneficiary secured by mortgage on beneficiary's land

  Trustee Act 2000

  • s.3: loan secured on land is an authorised investment
• alternatively beneficiaries may be able to vary the trust & divide trust property under Saunders v Vautier

Powers of maintenance

• trustees should pay trust income to adult life tenant or beneficiary with interest in trust income
• if beneficiary of trust income an infant trustees cannot pay as good receipt cannot be provided

  Trustee Act 1925

  • s.31: trustees have discretion to apply trust income for infant's maintenance, education or benefit
  • income not paid must be accumulated & used in future years or paid on end of trust
• Ts hold for A (A is 15 yrs old)
  A has vested interest: trustees have discretionary power under s.31 & surplus income paid on A reaching 18
• Ts hold for A for life reminder to B
  A is alive & B is 15 yrs old
  B only has interest in trust capital so maintenance cannot apply
• residue of estate left for A if he attains 21
  A has contingent interest in trust capital & interest in trust income
  if A is under 18: s.31 applies
  if A is 18 - 21: right to trust income
  A is 21: receive trust capital & income accumulated during his minority
  if A dies before 21: his estate not receive trust capital or accumulated income as A did not reach contingency (would pass according to will or held on resulting trust & pass on intestacy)
• settlor may vary statutory powers of maintenance